Jobs Data & AI Surge Signal Market Pivot: Fed Cut Odds Spike to 90%

Good Morning Investors

A sharp jobs revision, AI cloud optimism, and rising inflation expectations have created one of the most pivotal setups in recent memory. Tuesday confirmed the largest labor market downgrade in two decades, 911,000 jobs erased, forcing markets to reckon with just how much weaker the economy has been all year. But rather than sparking panic, it fueled the narrative for preemptive Fed rate cuts, with futures now pricing in nearly a 90% chance of easing next week.

At the same time, tech optimism is roaring back to life. Oracle delivered a monster forward guide that sent its stock soaring 30% in after-hours trading, adding fuel to the AI infrastructure boom. Apple unveiled its sleekest phone ever in the iPhone Air, even as investors debate whether design can substitute for true innovation in a maturing smartphone market.

All eyes now turn to this morning's PPI inflation print, the first of two key data points that will determine whether we get 25bps or 50bps from the Fed next week.

Let's unpack what's driving the narrative.

Futures are mixed after Tuesday's record highs. The S&P 500 ($SPY ( ▼ 0.56% )) is up 0.2%, the Nasdaq 100 ($QQQ ( ▼ 1.21% )) is higher by 0.1%, and the Dow ($DIA ( ▲ 0.01% )) is down 0.2% as traders digest Oracle's surge and prepare for inflation data.

Gold remains near record highs above $2,600, while oil is rising on OPEC+ output headlines. In Asia, Japan's Nikkei closed at a fresh record before paring gains, while Hong Kong extended its rally. European shares are firm on upbeat corporate guidance from Inditex and Novo Nordisk.

The key risk today is upside in the Producer Price Index (PPI). A reading of 0.4% or higher on core could stall the jumbo cut rally. Markets are currently expecting 0.3% across the board.

The Labor Market Revision That Changed Everything

The Bureau of Labor Statistics revised away 911,000 jobs from the past 12 months, the biggest downgrade since 2002, with nearly all losses concentrated in the private sector. Professional services, hospitality, and retail were hit hardest, and the monthly average now shows 76,000 fewer jobs per month than previously thought.

This revision is 50% larger than last year's already-massive adjustment and covers the period before Trump's policies took effect, making it a pure economic data story. The political stakes are rising as Trump already fired the BLS Commissioner after July's weak report, adding pressure on Fed Chair Powell to act decisively.

This isn't just an accounting adjustment. It rewrites the entire economic story for 2024. The job market was already deteriorating before any policy changes, and with unemployment at 4.3% and forward hiring intentions falling, the Fed now faces a credibility test on its dual mandate.

Meanwhile, mortgage applications jumped 9.2% last week as rates fell to 6.49% from 6.64%, the lowest since October. Housing affordability is recovering fast, creating another powerful case for rate cuts to prevent economic stalling.

Today's Producer Price Index (PPI) is expected to rise 0.3% month-over-month, with the core reading holding at 3.1% year-over-year. Tomorrow's Consumer Price Index (CPI) is forecast to show 2.9% on the headline and 3.1% on the core.

The Fed is likely to look through tariff-driven inflation, which is distorting prices in goods categories like autos, clothing, and furniture. But any signs that services inflation is reaccelerating could complicate the narrative.

Here's the critical threshold: Core CPI above 0.3% kills jumbo cut hopes. At 0.2% or below? 50bps becomes the base case. But there's a hidden risk if a 50bp cut is seen as panic rather than prudence, it could backfire spectacularly.

Oracle: The AI Infrastructure King Emerges

Oracle ($ORCL ( ▲ 1.64% )) blew the doors off with $455 billion in RPO, up 359% year-over-year. While earnings and revenue slightly missed, the forward outlook stole the show:

Multicloud database revenue exploded 1,529% year-over-year Cloud Infrastructure revenue grew 55% OCI growth guidance raised to 77% for FY25 Four multi-billion-dollar deals signed with three major customers Oracle projects $144 billion in cloud revenue within five years

CEO Safra Catz's bold prediction: "Over the next few months, we expect RPO to exceed half-a-trillion dollars."

The strategic partnerships are accelerating. Oracle landed OpenAI for 4.5 gigawatts of U.S. data center capacity, and Google's Gemini AI models are now available on Oracle Cloud Infrastructure. The stock, up 45% year-to-date through Tuesday, could push Oracle's market cap past $800 billion.

However, Oracle's capacity bottlenecks are real. Power constraints, chip availability, and debt market competition all pose risks to scaling. Its margins are also compressing with legacy software's 50%+ margins are giving way to 1–3% in infrastructure.

But strategically? Oracle is emerging as the hyperscaler's hyperscaler, with the company being a capacity provider to Amazon, Microsoft, and Google, rather than a direct competitor. That niche may prove highly valuable.

Apple: Design Over Innovation?

Apple ($AAPL ( ▼ 0.47% )) launched the iPhone 17 lineup led by the iPhone Air, which is a 5.6mm thin titanium-framed model priced at $999. The design is sleek, but critics noted a lack of groundbreaking features:

No foldable model yet No material Siri overhaul AI integrations remain modest

The fundamental challenge remains: Apple hasn't delivered a true iPhone supercycle in four years. With iPhone driving 51% of Apple's $391 billion revenue, the question isn't whether these phones are good, they clearly are, but whether incremental upgrades can drive meaningful upgrade cycles in a saturated market.

Still, the Pro line's new price structure could drive margin expansion, and Apple's hardware iteration remains solid. But its AI strategy still lacks a clear statement of differentiation.

Nebius & Microsoft: $17.4 Billion AI Infrastructure Deal

Nebius ($NBIS ( ▼ 1.17% )) signed a massive GPU infrastructure deal with Microsoft, valued at $17.4 billion with upside to $19.4 billion. This validates a new model of long-term compute outsourcing, as hyperscalers lock in supply amid ongoing chip scarcity.

SpaceX: $17 Billion Wireless Play

SpaceX's $17 billion spectrum deal with EchoStar is a game-changer. The acquisition lets Starlink build out a true direct-to-cell offering, no longer reliant on T-Mobile or AT&T. EchoStar stock is up over 20%, while traditional wireless names underperformed.

GameStop Surprises with Profit

GameStop ($GME ( ▼ 0.5% )) posted $168.6 million in net income in Q2 and saw collectibles sales surge 63%. The company is also building a crypto position, echoing the Michael Saylor playbook.

Markets are now debating not "if" the Fed cuts, but how much. Fed funds futures price in 88% odds of a 25bps cut, and 12% odds of a 50bps move next week.

The case for 50bps? Labor data is collapsing, housing affordability is recovering fast, and inflationary pressure is largely policy-induced via tariffs. The case against? Services inflation remains sticky, and a jumbo cut could spark panic about economic conditions.

Meanwhile, the AI infrastructure boom is gathering speed. Oracle's surge is a reminder that demand for high-performance compute is still exploding, and the market is rewarding those who provide capacity at scale.

Rate-sensitive sectors are positioning for policy inflection. Small and mid-cap stocks are rotating higher, housing names are responding to falling mortgage rates, and crypto remains highly sensitive to Fed policy. Q4 historically delivers crypto's strongest performance, supporting my Bitcoin target of $150,000 by year-end.

Despite equities gaining 10% year-to-date, investor sentiment remains surprisingly bearish. Historically, such positioning during an uptrend precedes further market gains, a contrarian bullish signal that shouldn't be ignored.

Tuesday's record highs sit atop a fragile foundation. The labor market has been weaker than believed for months, and the Fed's window for a soft landing is narrowing. An employment benchmark revision is coming that could slash another million jobs from the tallies.

Today's PPI and tomorrow's CPI will determine whether the Fed can act decisively, or if it gets boxed in by inflation and credibility risk.

This is still a bull market, led by structural themes like AI infrastructure, small-cap rotation, and rate-sensitive sectors like housing and crypto. But navigation requires precision.

Watch the data. Respect the volatility. Stay positioned for policy inflection.

Subscribe for daily market insights: https://dansheehan.beehiiv.com/subscribe

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.